Where is Recto’s group taking ISM?

WHEN a listed company either buys back its own shares in the open market or makes a tender to buy out minority stockholders, public investors may wonder why this was happening. What would the company do with the resulting treasury shares? Will it reissue them, meaning resell them at a price that could be higher than the price it paid in reacquiring them?

The minority stockholders may even be tempted to ask where the majority owners who control the board are taking their company. Unless a proper and comprehensive disclosure is made, they could simply watch from the sideliens as corporate events unfold without their knowing the direction the shares they own would take. Would the price go up? The worst effect of a buyout is the fear that it is time to sell.

While there are no answers to such questions, the public may be assured of one thing: Any buyback or tender would mean a huge reduction in the number of outstanding shares which could prop up the stock’s market price. Will this happen to ISM Communications Corp.?

Well, the public could only remain vigilant because ISM, after the tender, should be worth watching. Never mind if they are never privy to inside information. Never mind if they would not be told what the company plans to do with its treasury shares. Due Diligencer is reporting here the result of ISM’s reacquisition spree.

ISM’s offer to buy, which started in December last year and ended on January 23, attracted more than the target shares. Its acquisition of its own shares was so successful that “a total of 1.4 billion common shares of the outstanding capital stock of ISM were tendered.”

What to do with the excess? As is the practice, ISM said it “only accepted the tendered shares on a pro rata basis.” As a result, the company bought only 1.2 billion shares at P1.52 per share, an acquisition that effectively reduced by 62.6 percent its outstanding shares to 716.2 million from 1.9 billion.

It was not only ISM’s foreign stockholders, who used to own 572.8 million shares, that took advantage of the tender. Even significant insiders led by Eric Recto, chairman of the board, were among the sellers. A posting on the website of the Philippine Stock Exchange showed that Recto and 11 others, also members of the board, sold 437.5 million shares which grossed them P665 million.

With their sale of some of their holdings, they were left owning 182.6 million shares, or 25.5 percent of outstanding shares. The board used to control 620.2 million ISM shares, or 32.4 percent, a dilution of 6.9 percent.

In a public ownership report as of Dec. 31, 2014, ISM listed three significant foreign corporate stockholders that belong to the Ashmore group. These are EMDCD Ltd., which owned 196.6 million shares, or 10.9 percent; Asset Holder PCC No. 2 Ltd.-Ashmore Asian Recovery Fund which owned 376.2 million shares, or 19.6 percent; and AISM BV, which held 180 million shares, or 9.4 percent.

As of Dec.1, 2014, Recto was ISM’s single biggest stockholder. He indirectly owned 433.9 million shares held by Monfortino Holdings Inc., his corporate vehicle. In addition, he directly owned 50 shares. After the tender he still owned 71.8 million shares, or 10 percent, significant enough for him to stay on top of the list of stockholders.

Now let us look at ISM’s financials. ISM was able to make a tender to buy because it had enough retained earnings to make the offer.

As of September 30, 2014, it had retained earnings of P1.9 billion, which it almost “wiped” out by spending P1.8 billion, or almost 95 percent, to carry out the tender. Its additional paid-in capital amounted to P455.3 million, which meant it had sold shares at a premium. Since ISM had issued 1.9 billion shares at the par value of P1, in effect, it had raised a total of P2.4 billion from the issuance of shares.